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Reward for risk rising rapidly
We believe the key question on investors’ minds right now is whether to catch
the falling knife, or wait for markets to stabilise.
The last time US equities were this cheap was after Lehman collapsed in
September 2008. That’s David Rickards’ conclusion when he estimated the US
equity risk premium following S&P cutting America’s credit rating to ‘AA+’.
The US equity risk premium has risen to 6.9%, which is 2.4 standard deviations
above the long term average, but still below the peak of 7.6% seen in December
2008. In that case, the fall in the risk premium began with a 100bp increase in
bond yields, while equities continued to fall until March 2009.
For investors with a long term outlook, David believes equities are cheap and
can be purchased. He favours a defensive approach, and also expects growth to
outperform value. This is because companies with higher earnings certainty
generally outperform in a weakening economic environment, despite their often
higher valuations. Neale Goldston-Morris makes a similar point when he
argues investors should focus their investments in sector leaders, as they will be
the first to bottom when the market inevitably turns up.
Given David’s view that equities are cheap, the key question is when to shift
from a defensive strategy. David believes it’s prudent to wait for a signal from
the US bond market. Specifically, based on 2008/09, he expects bonds to rise
50-to-100bp before a sustained rally in equity markets occurs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reward for risk rising rapidly
We believe the key question on investors’ minds right now is whether to catch
the falling knife, or wait for markets to stabilise.
The last time US equities were this cheap was after Lehman collapsed in
September 2008. That’s David Rickards’ conclusion when he estimated the US
equity risk premium following S&P cutting America’s credit rating to ‘AA+’.
The US equity risk premium has risen to 6.9%, which is 2.4 standard deviations
above the long term average, but still below the peak of 7.6% seen in December
2008. In that case, the fall in the risk premium began with a 100bp increase in
bond yields, while equities continued to fall until March 2009.
For investors with a long term outlook, David believes equities are cheap and
can be purchased. He favours a defensive approach, and also expects growth to
outperform value. This is because companies with higher earnings certainty
generally outperform in a weakening economic environment, despite their often
higher valuations. Neale Goldston-Morris makes a similar point when he
argues investors should focus their investments in sector leaders, as they will be
the first to bottom when the market inevitably turns up.
Given David’s view that equities are cheap, the key question is when to shift
from a defensive strategy. David believes it’s prudent to wait for a signal from
the US bond market. Specifically, based on 2008/09, he expects bonds to rise
50-to-100bp before a sustained rally in equity markets occurs
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